What’s ahead for cryptocurrencies and blockchain?

Reflecting on the sudden collapse of the cryptocurrency exchange FTX and the continuing volatility of Bitcoin, Professor Ciamac C. Moallemi still believes that the promise of blockchain technologies and other digital innovations will continue to transform the investor experience.

Moallemi, the William von Mueffling Professor of Business in the Decision, Risk, and Operations division of the Columbia Graduate School of Business, specialises in the study of market structure.

Here, he shares his perspective on the necessity of reevaluating investor safeguards while refocusing on the contributions this nascent industry could make in creating new markets – and its potential for connecting people without the need for intermediaries.

What’s your take on the ongoing disruptions in the market from the implosion of FTX and the volatility in cryptocurrency?

Obviously, it’s a big, big shock to the market. Most people did not expect an event of this magnitude with those particular players. In the short term, it’s quite negative. It’s going to dampen interest, but in the longer term, there may be some positive aspects.

I think the challenge is that crypto wasn’t really decentralised. Entities like Binance and FTX are largely opaque and centralised. But at the same time, there’s no regulation. It would be a positive outcome if this pushed things back towards the decentralised technological roots of crypto, rather than regarding it as just a mechanism for centralised entities to evade regulation.

What’s your perspective about how recent events will shape the field?

If you look at the traditional financial system, it’s a very centralised and regulated world that came about through battle testing and experience. We’ve developed a lot of regulations and investor protections. If you look at the promise of crypto, the idea is to leverage blockchain technology to perform a lot of the same functions but without necessarily entrusting intermediaries. The real promise is in ideas like decentralised finance, where you’re trading in a way where you don’t have to trust the exchange – so maybe there isn’t as much of a need for regulation.

If there isn’t as much need for regulation, what kind of regulation would you see helping safeguard investors?

In terms of regulation, you need balance. Regulations are very important from an investor protection perspective in the sense of avoiding situations like what happened with FTX. The flip side, though, is that one of the benefits of the underlying crypto technologies – one of the advantages of that ecosystem not being regulated – is that it’s really been possible to experiment. There are experiments with different types of market structures and ideas that would basically be impossible in the traditional financial system.

For example, trading and settlement in a traditional financial system really haven’t changed fundamentally in decades. That’s not due to a lack of ideas, but to the very highly regulated environment. You do get protection, but the flip side is it’s very hard to do something different, something that may be outside the scope of regulation or may be not anticipated by regulators. Right now, the nice thing about the blockchain world is that people have been able to experiment and come up with novel structures for things like enabling trading directly between end users without intermediaries, for enabling peer-to-peer lending protocols and things like that. It’s been a great lab to experiment in. From the perspective of policy, the important thing is to protect investors. But at the same time, it’s important to try ideas and innovation and see what works.

Given your expertise in market structure, what new developments are you watching?

Here is the positive speculative vision for blockchain technology: We’re in a world that’s increasingly digital, modulated by information technology. We interact with other people through computers and various services. Blockchain offers one mechanism for interactions. It’s a fundamental technology of programmable blockchains and smart contracts. You can set up complex rules that govern how different agents are allowed to interact, which creates a potential for much richer mechanisms.

Contrast that with more traditional settings. We’re already interacting quite significantly digitally, but to a large extent, these interactions are modulated by large tech companies. So when we interact on social networks like Twitter or Facebook, those entities are in the middle. When we require transportation, we use Uber; for lodging, we use Airbnb. These are all pieces of technological infrastructure that allow us to interact digitally. But when you entrust the interaction to companies, there’s potential for those companies to leverage their market position to extract monopoly rents.

Can you give a specific example?

If you look at Airbnb, they take 30 percent of the revenue that goes to their hosts. Airbnb is not providing the apartment, and they’re not cleaning it. They just set up a website. And 30 percent is quite a large fee. The reason Airbnb is able to extract that high amount is network effects. They’ve established themselves as a brand where people go to search for lodging.

Now imagine an alternate world where matching people who have lodging with people who want to rent lodging is not done by a centralised entity with its own interest. Instead, that matching could be done through open protocols. And in that world, maybe you don’t need to pay intermediaries like Airbnb. So that’s the positive vision of blockchain.

It sounds like you see the technology moving to more of a Craigslist model than an eBay one.

Craigslist is operated in a way that might be considered a bit more democratic, but that’s just the whims of the founders of Craigslist. Blockchain offers the possibility to do that in a more systematic and enforceable way. In the decentralised finance world, it’s possible to borrow and lend, to trade with other people, without intermediaries extracting their piece of the pie. Maybe it hasn’t yet gotten to the point where it’s as efficient as centralised markets, but that’s the longer-term vision.

There have been crypto skeptics for years, questioning the need for an alternate currency. In 2018, on CNBC, for example, Warren Buffett predicted they will come to a bad ending. If greater stability emerges, as you described it, do you see a value in cryptocurrencies?

I would view adoption of blockchain technology as not necessarily the same question as, “Do you want to have an alternative currency?” It is true that there are alternative currencies in the blockchain world. However, these currencies do have significant downsides. For example, they’re extremely volatile because they represent a kind of technology. What you’ve seen in the past few years is actually the rise of stablecoins like USD Coin or Tether. I think this is basically end users arguing, “Look, we need something that’s tied to traditional currencies because we really want to leverage some of this smart contract functionality, but we don’t want to be exposed necessarily to the volatility or risk of a new currency.” They’re not the same thing. You can adopt the technology without the currency. You can have blockchains that settle transactions in dollars or more traditional currencies.

What do you see happening short term?

Clearly, what happened with FTX is going to have a cooling effect. The headlines are not good news from the perspective of individual investors. But perhaps it’s better if it’s not easy for individuals to invest in these kinds of products. I see blockchain as a very speculative technology. It might be reasonable for an individual to put a very small percentage of assets in something like this, the same way you might make a small angel investment if a friend starts a company or if you’d like to personally experiment with a new technology. That’s the way it should be viewed.

What’s your outlook for 2023?

From my perspective, a lot of the speculative money is going to leave the sector, and a lot of the noise is going to disappear, leaving a bit more focus on the technology. There’s a lot of money still invested in crypto, and the industry has a runway of maybe a few years. I don’t know how long it will take to demonstrate that it can achieve its longer-term vision of providing useful services and connecting people in a trustless way without intermediaries. In the near term, we should focus more on the underlying technology and less on whether we should invest in these things.

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